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February 2017

Weekly Currency Insights from Halo Financial

Published: Tuesday 07 February 2017

What to look out for this week…
  • Sterling faces a busy week, politically 
  • Flurry of Canadian data announcements expected
  • Beware unintended consequences in Europe 
  • Big week for Australia and New Zealand 
Brexit remains the buzzword in the UK

Brexit is the word once more this week, with the release of the UK Government White Paper and the final vote on Article 50. The White Paper is unlikely to provide much more information than the speech that the UK Prime Minister, Theresa May, made a few weeks ago. UK economic data is positive and Sterling is holding fast, but the vast quantities of negotiations with the EU that lie ahead are going to rock the boat – of that, there is no doubt.

PwC’s chief economist released a report which predicts that Brexit will cause the UK to suffer “medium term lag”, but go on to become one of the top performers of the G7 in the next 30 years and beyond.  Sadly, this had no effect on Sterling’s strength, although there is not much data to work with for the UK this week, other than the Halifax House Price Index. 
 
Strength for the US and Canadian Dollars
 
There’s some significant data to come out of Canada this week, too. Today, we expect housing market data and the Ivey Business Sentiment Index, both of which are expected to bring positive results, so both announcements have the potential to strengthen the Canadian Dollar. Murmurs from the US Federal Reserve that there may be support to increase the base rate next month boosted the USD, causing the Pound to fall against its major currency partner by a cent.
 
European Central Bank warns of unintended consequences
 
In Europe, President of the European Central Bank (ECB), Mario Draghi, warned of the unexpected consequences post-quantitative easing, saying that markets are overly reliant on money coming through from Frankfurt and warning that liquidity could all end very suddenly: “Liquidity is there until it is not, and it goes very quickly.” This strong hint that monetary control will increase caused the Euro to strengthen overnight.
 

 
Looking over to Asia Pacific, European Union Trade Commissioner, Cecilia Malmstrom, announced on Monday that she hopes to use Europe’s strong trade relationship with China as an olive branch against protectionism that has risen across the globe in the past few years.  
 
Flurry of data for Australia and New Zealand sets the tone for 2017

And we have lots of news coming from Australasia, too. There was a surprise slowdown in Australian retail sales for December 2016. The key festive season sales fell by 0.1 percent, far lower than the forecast 0.3 percent rise. However, the final quarter of 2016 showed positive figures overall, which is a good sign for the growth data for the final quarter of 2016.
 
The eagerly awaited Reserve Bank of Australia’s (RBA) statement on interest rates was calm, yet positive, as they kept the base rate unchanged. This was a sign of confidence for the markets, helping the Australian Dollar to gain a cent against Sterling.
 
In New Zealand, we will also receive the inflation forecast from the Reserve Bank of New Zealand, which is expected to be higher, followed by their interest rate decision. Like Australia, we expect this to be held at the current rate, particularly given surprisingly high unemployment figures that weakened the NZ Dollar last week, but the announcement should give an indication of the sense of direction for interest rates and for the New Zealand Dollar throughout 2017.
 

What you may have missed last week…

 
Busy Britain

Last week was certainly eventful! The UK had its 'Super Thursday', where the Bank of England (BoE) significantly raised its 2017 growth forecast to a much more positive figure of 2% – an increase from the original estimate of 1.4% and the previous upgrade from 0.8%. There was a note of caution though; 2018 will bring a slowdown, according to Mr Carney. We are not yet at the rate hike stage, but the BoE is clearly preparing the ground for a move in that direction; perhaps even before the year end. Despite the good news for the UK economy, Sterling fell after the announcement, but traders had been buying the Pound in advance of the statement, as many were anticipating an even more hawkish sentiment. Sterling hovered around USD 1.26 and EUR 1.165 as Mr Carney spoke.
 
Manufacturing and Service Sector Purchasing Managers’ Index (PMI) figures were broadly positive for both the UK and Europe, although inflationary pressures and rising costs at each stage are taking their toll.

European data positive 

There is also more EU economic data due to be released this week, in the form of the Construction and Service Sector Purchasing Managers’ Indices (PMI). Banks were, perhaps surprisingly, the highest performers in the European Service Sector results, with reassuringly strong results for the financial sector as a whole. The manufacturing sector in the Eurozone is performing far better than its service sector counterparts, showing growth and improvement across the board. Retail sales in the region – as expected – haven’t changed much since December 2016, showing only a small increase in January 2017. France and Germany saw an increase in growth and sales fell further in Italy, balancing out the overall figure.

US interest rates remain the same – for now…

As expected, the Federal Reserve left interest rates at the current level, weakening the US Dollar slightly; markets still anticipate a rate hike in the coming months – potentially March but perhaps more likely in June. US policymakers reiterated that their decisions would be dependent on data, and that they expected that there will be a gradual evolution in the markets and only incremental rate increases. The US Manufacturing PMI posted the strongest production growth figures for nearly two years, with strong growth in output and new orders. However, like the UK and EU, input costs are rising rapidly.
 
Action in the Antipodes…

In New Zealand, the NZ Dollar weakened as the growing unemployment rate took markets by surprise – up to 5.2% from the expected drop to 4.8%. Although a lot of this change was attributed to a larger pool of potential employees, the increase spelled bad news for the NZ central bank’s upcoming interest rate decision.
 
The Business Confidence Index for Australia showed a dramatic increase in December 2016, from +6 to +11 – twice as much as forecast and showing positive signs for the effects of economic recovery on business sentiment. However, with the overarching air of caution, this did little to move the Australian Dollar.

Weekly Currency Insight by Rachael Kinsella


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